Financial Stability - A Regional
Perspective
By
Dr. Iyabo Masha
IMF Resident Representative
Presented at the International Conference on
Financial Stability in Sierra Leone – The Road Map
Organized by
Bank of Sierra Leone and IMF Money and Capital Markets Department
FREETOWN, SIERRA LEONE
July 3, 2017
OUTLINE OF PRESENTATION
I. Financial Stability – Background Issues
i. Concept and Definition
ii. Linkages to the macroeconomy
II. Recent Economic Developments and Financial Spillovers
i. Global Developments – evidence from 2017 GFSR
ii. Regional Developments – evidence from 2017 Africa Regional Economic Outlook
III. West Africa Financial Stability- Regional Financial Stability FrameworkIII. West Africa Financial Stability- Regional Financial Stability Framework
i. State of Play
ii. Financial Stability Indicators – Banking Sector
iii. Financial Stability Indicators – Non-bank Financial Institutions(evidence from WAMZ Financial Stability Report
IV. Financial Stability Challenges in the Region: Policy Focus Going Forward
V. Conclusion
2
PART I
FINANCIAL STABILITY – BACKGROUND ISSUES
Concept and definitioni. Concept and definition
ii. Linkages to the macroeconomy
3
FINANCIAL STABILITY: CONCEPT AND DEFINITION
“A financial system is in a range of stability whenever it iscapable of facilitating (rather than impeding) theperformance of an economy, and of dissipating financialimbalances that arise endogenously or as a result ofsignificant adverse and unanticipated events” (Schinasi,2004)
“Financial stability is a condition, in which an economy’s“Financial stability is a condition, in which an economy’smechanisms for pricing, allocating, and managing financialrisks are functioning well enough to contribute to theperformance of the economy.” (Schinasi, 2005)
4
FINANCIAL STABILITY CONCEPT AND DEFINITION
The first definition implies that a financial system is stable when there is
confidence in the ability of the system to manage and absorb potential
macroeconomic shocks with minimal disruption of economic and financial
activity. The second definition states out the key roles of the financial system:
• Efficient and smooth allocation of economic resources: A stable financial system facilitates efficient and smooth allocation of resources inter-
temporally and spatially between savers and investors.
• Identification and management of potential risks: In a stable financial system, potential risks are continuously identified, reasonably priced and effectively
managed.
• Absorption and containment of financial and economic shocks: A stable financial system is able to absorb and contain shocks to the financial and
real sectors with minimal disruption to financial and economic activity.
5
FINANCIAL STABILITY AND MACROECONOMIC LINKAGES
� In the absence of financial stability, the capacity of financialmarkets to facilitate trade, production, capital accumulationeconomic growth and social welfare is hampered.
� The consequences of financial instability are manifested in:
� Decline in national output and incomes – real GDP growth
� Increased fiscal expenditures – fiscal deficit
� Balance of payments deficits – external balances and reserves accumulation
� Exchange rate instability – prices and competitiveness
� A stable financial system is necessary for sustainable GDP
growth and low inflation. Similarly, sustainable growth in the
economy with stable prices will also make the economy less
prone to financial instability. 6
GLOBAL LINKAGES
In an interdependent world, global financial stability maters
� The global financial crisis of 2007-2009 showed that financial stability can be jeopardized even in an environment of price stability and macroeconomic stability.
� Any disruption in the financial system anywhere in the world has the potential of affecting the real economy not only in that country but also elsewhere. The extent of transmission of disruptions through different channels, namely finance, trade and confidence channels was strong.
� Domestic financial stability cannot be a sufficient goal in the absence of a conducive global environment.
7
PART II
RECENT ECONOMIC DEVELOPMENTS AND
FINANCIAL SPILLOVERS
i. Global Developments – evidence from 2017 Global Financial Stability Report
ii. Regional Developments – evidence from 2017 Africa Regional Economic Outlook
8
GLOBAL FINANCIAL STABILITY - EVIDENCE
FROM 2017 GFSR
The financial crisis of 2007-09 and its aftermath emphasized the need for a global approach when assessing financial stability risks. In this context, IMF’s biannual Global Financial Stability report, GFSR assesses global financial stability, identifying potential sources of risks and vulnerabilities.
According to the 2017 edition:
� Global financial conditions are broadly stable: Financial stability continued to improve since October 2016.since October 2016.
� Economic activities and interest rates are increasing: Economic activity has gained momentum and longer-term interest rates have risen, helping to boost the earnings of banks and insurance companies.
� Political and policy uncertainties have heightened: Threats to financial stability are emerging from elevated political and policy uncertainty around the globe. Policy developments in advanced economies that cause unanticipated changes in growth and debt could result in rising risk premiums and volatility in financial markets.
� Shifts towards protectionism: A shift toward protectionism in advanced economies could reduce global growth and trade, impede capital flows, and dampen market sentiment. 9
GFSR 2017 (CONTD)
The macro environment has important effects on the financial stability:
� Low growth / low interest rate environment: A prolonged low-growth, low-interest rate environment can fundamentally change the nature of financial intermediation. In such an environment, yield curves would likely flatten.
� Bank earnings: Combined with low credit demand, this would lower bank earnings, particularly for smaller, deposit-funded, and less diversified earnings, particularly for smaller, deposit-funded, and less diversified institutions.
� Impact on non bank financial institutions: Prolonged low interest rate also presents long-lasting challenges for life insurers and defined-benefit pension funds.
� Achieving domestic policy objectives: Though global shocks have significant impact on domestic financial conditions, countries retain influence to achieve domestic objectives—specifically, through monetary policy. 10
GFSR (2017) RECOMMENDATIONS
� US policy mix: In the United States, policymakers
should provide incentives for economic risk taking
while guarding against excessive financial risk taking.
� Emerging market economies should address domestic
imbalances to enhance their resilience to external
shocks.shocks.
� Developing economies should continue to
strengthen supervisory frameworks.
� There should be no rollback of the post-crisis reforms
that have strengthened oversight of the financial
system in other regions.
11
REGIONAL MACRO DEVELOPMENTS -EVIDENCE FROM AREO (2017)
GAB
ERI
BWA
5
6
7
8
Fre
qu
en
cy
Resource-intensive countries
Nonresource-intensive countries
Weighted
average = 5.0Median = 5.1
Prior to 2015, African countries experienced high rates of economic growth,
improvements in macroeconomic fundamentals, resulting in significant
transformation and growth of their financial systems.
Real GDP Growth, Average 2010–15
SSD GNQ CPV GIN ZAF GMB SWZ MUS SEN MWI UGA NGA ZMB TZA ZWE GHA ETH
CAF MDG GNB MLI STP COG TGO NAM NER RWA COD
COM BDI LSO CMR SLE KEN TCD MOZ
BEN AGO SYC CIV
LBR BFA
GAB
0
1
2
3
4
5
≤ –2 –2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8 >8
Fre
qu
en
cy
Percent
12
REGIONAL MACRO DEVELOPMENTS -EVIDENCE FROM 2017 AREO
COM CMR BFA
CPV
BEN
4
5
6
7
8
Fre
qu
en
cy
Resource-intensive countries
Nonresource-intensive countries
Weighted
average = 1.4
Median = 3.7
Since 2016, SSA economic growth slowed sharply, averaging 1.4 percent, the
lowest in two decades.
Real GDP Growth, 2016
SSD NGA LBR SWZ ZAF ZWE MWI ZMB MOZ MUS SYC UGA TGORWA KEN TZA ETH
GNQ BDI AGO NAM GMB LSO ERI STP SLE MLI SEN CIV
COG GAB BWA MDG NER GNB
TCD COD GHA CAF GIN
0
1
2
3
4
≤ –2 –2.0 –1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8 >8
Fre
qu
en
cy
Percent
13
REGIONAL MACRO DEVELOPMENTS -EVIDENCE FROM 2017 AREO
Drivers of the slowdown
� Exogenous : global commodity price decline, compounded by problems with security and food shortage in several countries.
� Policy drivers: lack of flexibility in exchange rate policy and recourse to excessive domestic financing as external financing dried up.
� Inadequate policy response which magnified the adverse outcomes in many countries.
14
700
800
900
1,000
Basis
poi
nts
Emerging markets
Sub-Saharan Africa frontier markets
The impact of the slow down is pronounced. Borrowing cost has risen
sharply, making external market financing less attractive.
EVIDENCE FROM 2017 AREO CONTD.
Frontier and Emerging Market Spreads, 2014-17
200
300
400
500
600
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
Basis
poi
nts
15
AGOBDI
CIV
GAB GHA
GNB
KENSYC
SLE
UGA20
25
30
35
Dec.
2016
or la
test a
vaila
ble, p
erce
nt of
com
mer
cial b
ank a
ssets
Increasing Exposure
EVIDENCE FROM 2017 AREO CONTD.
As a result, domestic financing is being accumulated at a high pace.
Exposure of Commercial Banks to the Government
BEN
BWA
BFA
CPV
CMRCAFTCD
COMCOD
COG
CIV
GNQ
GIN
GNB
LSO
LBR
MDG
MWI
MLI
MUS
MOZ
NAMNER
NGA
STP
SEN
ZAF
SSD
SWZ
TZA
TGO
ZMB
0
5
10
15
0 5 10 15 20 25 30 35Dec.
2016
or la
test a
vaila
ble, p
erce
nt of
com
mer
cial b
ank a
ssets
Average December 2010–13, percent of commercial bank assets
Decreasing Exposure
16
15
20
25
30
Per
cent
2013
Latest available
EVIDENCE FROM 2017 AREO CONTD.
Financial sector asset quality is declining.
Nonperforming Loans to Total Loans
0
5
10
CA
F
SLE
GN
Q
NE
R
LBR
GH
A
CM
R
TCD
AG
O
GIN
TZA
ZAF
BW
A
NG
A
GA
B
NA
M
CO
G
SE
N
MD
G
BD
I
SY
C
SW
Z
RW
A
UG
A
KE
N
MU
S
LES
MO
Z
Resource-intensive countries Nonresource-intesnive
17
-10
0
10
20
Perc
enta
ge p
oint
s
EVIDENCE FROM 2017 AREO CONTD.
As governments ramp up domestic borrowing amid declining economic
activities, credit to the private sector is declining.
Change in Credit Growth to the Private Sector, Average 2011–13 vs. 2016
-50
-40
-30
-20
TCD
GAB
COG
AGO
GNQ
CMR
NGA
ZWE
CAF
GIN
ZMB
BFA
LBA
GHA
BWA
TZA
NAM
NER
ZAF
SLE
COD
MLI
GNB
GM
BLS
ORW
AKE
NM
USUG
ATG
OSW
ZSE
NBD
IBE
NCP
VST
PET
HCO
MM
WI
MDG ER
ICI
VSY
CM
OZ
Oil Exporters Other resource-intensive countries Nonresource-intensive countries
Perc
enta
ge p
oint
s
18
PART III
WEST AFRICA FINANCIAL STABILITY
Regional Financial Stability Frameworki. Regional Financial Stability Framework
ii. Financial Stability Indicators – Banking Sector
iii. Financial Stability Indicators – Non-bank Financial
Institutions - evidence from WAMZ Financial Stability Report
19
REGIONAL FINANCIAL STABILITY FRAMEWORKRegional financial stability framework is based on international best practice and in the recent past, considerable efforts have been made to strengthen the legal and regulatory frameworks of the financial sector in the region.
� Technical Assistance: IMF and other international organizations provide technical assistance to improve the legal and regulatory framework and enforcement capabilities of the national authorities.
� Training: Supervisory staff from SSA countries have participated in training seminars offered by the IMF Institute in Washington as well as regional training centers.
� FSAPS: Joint IMF-World Bank Financial Sector Assessment Program, FSAPs have helped to identify weaknesses and proposed corrective measures, many of which have been implemented by the countries concerned.
� WAMZ: The West African Monetary Zone has a College of Supervisors that provides a platform for supervisory cooperation and strengthening of regional financial stability.
� Non bank FSI: Developing and compiling FSIs for non-banks, life and non-life insurance companies, credit unions and pension funds is however limited.
20
Bank Supervision and
Regulation
Other Multi Topic
Crisis Management
Bank Supervision and Regulation
Other Financial Stability
Monetary and Foreign Exchange
Operations
IMF Technical Assistance Field Delivery by Topic
Financial stability related TA represent the highest proportion of IMF MCM TA missions in FY2016.
Other Financial Stability
Monetary and Foreign
Exchange Operations
Monetary and Foreign
Exchange Policy
Asset / Liability
Management OperationsMonetary and Foreign Exchange
PolicyAsset / Liability Management
Other Multi Topic
Crisis Management
Source: IMF / MCM databases.
21
FINANCIAL STABILITY INDICATORS: STATE OF
PLAY - BANKING SECTOR
Banking risks Metric
SSA
Average1
West Africa
Average2
Credit risk NPL/TL 10.8 13.5
Sub Saharan Africa Banking Risk Analysis, 2016
Profitability risk ROA 2.2 2.4
Capital adequacy risk Rcap/RWA 18.8 11.9
Source: IMF Global Financial Soundness Indicators; http://data.imf.org/?sk=51B096FA-2CD2-40C2-8D09-0699CC1764DA
1. 21 countries reporting.
2. Chad, Ghana, Guinea, Nigeria reporting.
NPL, TL, ROA RCAP and RWA refer to Nonperforming loan, total loan, return on asset,
bank regulatory capital and risk weighted asset respectively.
22
FINANCIAL STABILITY INDICATORS: STATE OF
PLAY - BANKING SECTOR
6.00
8.00
10.00
12.00
14.00
16.00
Credit risk, 2010-16
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
SS
A A
vera
ge (
NP
L/T
L)
WA
Avera
ge (N
PL/T
L)
SS
A a
vera
ge (R
OA
)
WA
ave
rage (R
OA
)
SS
A a
ver
age (R
cap/R
WA
)
WA
ave
rage (R
cap/R
WA
)
Financial soundness, 2010-16 (average)
0.00
2.00
4.00
6.00
2010 2011 2012 2013 2014 2015 2016
SSA Average (NPL/TL)
WA Average (NPL/TL)
SS
A A
vera
ge (
NP
L/T
L)
WA
Avera
ge (N
PL/T
L)
SS
A a
vera
ge (R
OA
)
WA
ave
rage (R
OA
)
SS
A a
ver
age (R
cap/R
WA
)
WA
ave
rage (R
cap/R
WA
)
Credit risk SSAAverage (NPL/TL)
Profitability Capital Adequacyrisk
Data source: IMF Financial Soundness Indicators database
23
2.00
2.50
3.00
3.50
4.00
Profitability, 2010-16
15.00
20.00
25.00
Capital adequacy risk, 2010-16
FINANCIAL STABILITY INDICATORS: STATE
OF PLAY - BANKING SECTOR
0.00
0.50
1.00
1.50
2.00
2010 2011 2012 2013 2014 2015 2016
SSA average (ROA)
WA average (ROA)
0.00
5.00
10.00
2010 2011 2012 2013 2014 2015 2016
SSA average (Rcap/RWA)
WA average (Rcap/RWA)
Data source: IMF Financial Soundness Indicators database
24
FINANCIAL STABILITY INDICATORS: NON
BANK FINANCIAL INSTITUTIONS (NBFI)
� NBFIs in the region comprise insurance companies,
pension administration; primary mortgage companies,
rural and community banks and finance companies.
� They play important role in promoting financial
inclusion and risk sharing in the region. However, theirinclusion and risk sharing in the region. However, their
size is very small.
� They remain largely unregulated, though some
countries notably Nigeria and Ghana are now
improving regulatory oversight.
25
PART IV
FINANCIAL STABILITY CHALLENGES IN THE
REGION: POLICY FOCUSREGION: POLICY FOCUS
26
KEY FINANCIAL STABILITY MATTERS FOR
POLICY FOCUS
� Development and enforcement of micro prudential
regulations
� Establishment of robust crisis management framework
� Improvement of cross border supervisory oversight
� Improvement of efforts to build FSIs for non-banks,Improvement of efforts to build FSIs for non-banks,
insurance, credit unions and securities firms that operate
in the regional economy.
� Adoption of IFRS methodology in financial reporting
� Undertake risked based supervision
� Mitigate macroeconomic risks from fiscal dominance.
27
THANK YOU!!!THANK YOU!!!
28
REFERENCES
� Africa Regional Economic Outlook (2017) Washington, D.C. : International Monetary Fund http://www.imf.org/en/Publications/REO/SSA/Issues/2017/05/03/sreo0517
� Global Financial Stability Report (2017) Washington, D.C. : International Monetary Fund
� http://www.imf.org/en/Publications/GFSR/Issues/2017/03/30/global-financial-stability-report-april-2017
� Schinasi, G., (2004), “Defining Financial Stability”, IMF Working Paper No. WP/04/187, October http://www.imf.org/en/Publications/WP/Issues/2016/12/31/Defining-Financial-Stability-17740
------------- (2005) Safeguarding Financial Stability Theory and Practice Washington, D.C. : � ------------- (2005) Safeguarding Financial Stability Theory and Practice Washington, D.C. : International Monetary Fund https://www.imf.org/External/Pubs/NFT/2005/SFS/eng/sfs.pdf
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